The Internet is a worldwide network of interconnected computers and is gaining acceptance as a medium for facilitating commercial transactions. Many methods used to carry out business transactions via the Internet generally correspond to those used in pre-Internet commerce. Such methods may employ various market-clearing mechanisms within the context of a marketplace.
A marketplace is a location where multiple buyers and multiple sellers transact business. A market-clearing mechanism identifies a buyer and a seller and sets the price for each transaction in the marketplace. The kind of market-clearing mechanism to use for a particular marketplace is largely determined by whether the marketplace serves one or many potential buyers or sellers.
In one type of a marketplace, a single buyer and a single seller attempt to complete a sale. Once the buyer and seller are identified, the only task remaining for the market-clearing mechanism is to set the price. In this situation, the traditional and appropriate price-setting mechanism is one-on-one negotiation, in which the buyer and seller negotiate until they reach a mutually acceptable price or decide not to complete the transaction.
In another type of a marketplace, multiple buyers and a single seller attempt to conduct business. There are multiple potential buyers and only one seller here. Therefore, the market-clearing mechanism must determine the buyer and price. This kind of commerce is fundamentally seller-driven. The seller chooses the product, sets the transaction terms and seeks market venues where it can achieve the highest price. Two common venues are retail sales and auctions, also referred to as “forward auctions,” in contrast to “reverse auctions” discussed below.
In an ordinary retail sales setting, a seller offers a specific product at a posted price. Those persons who are willing to pay the posted price may purchase the product, and those who are not willing to pay the posted price may choose not to purchase the product.
In one form of retail price setting that has become popular on the Internet, retailers publish a stepped-price schedule for a product that may be purchased during a period determined by the retailer. Some examples of this type of on-line retailing are Mercata (“www.mercata.com”), MobShop (“www.mobshop.com”), and Volumebuy (“www.volumebuy.com”). These systems implement the traditional retail venue with a pricing twist. The price paid by each buyer is a function of the total quantity of product sold during the purchase period. The price declines as the total quantity sold increases. The primary economic value of this pricing method is that it encourages buyers to recruit other buyers and reduces the customer acquisition costs of the seller. Note that the retailer is motivated to set the pricing steps to maximize its profits, not the buyers' savings. With no competitive bidding among multiple sellers, there is no assurance that the posted price is competitive.
Another venue is an auction in which buyers have a limited bidding period to offer a price for a seller's product. In an auction, multiple buyers bid for the product and the price rises during the bidding period. While bidding may start at a very low price, the seller has the option of setting a “reserve price” below which the seller will not have to complete the sale. The transacting buyers will be those buyers offering the highest prices that equal or exceed the seller's reserve price.
Forward auctions may take various forms, and the specific form of an auction will depend upon the amount of available product and the goals of the seller and the prospective buyers. If there is only one unit of a product, then the single highest bidder will be the only transacting buyer.
When there are multiple available units and multiple potential buyers, variations of the basic auction format may be used. In one popular form, the transacting buyers are the N highest bidders who will consume the available N-unit supply of product. They will each pay their bid price. Thus, different buyers may pay different prices. In another form, known as a “Dutch auction,” the transacting buyers are the N highest bidders who will consume the available supply of product and they all pay one price, the lowest price bid by any of the transacting buyers. Auctions can have many variations on these basic themes. The essence of an auction is that multiple buyers bid increasing prices for the products of one seller and that offers to buy and sell are binding upon the buyers and seller.
There is no mechanism in these traditional single-seller auctions to automatically consolidate demand to produce lower prices. Aggregating demand at an auction would raise prices rather than lower them, as increasing demand seeks limited supply. Auctions have become popular on the Internet. Ebay is the current dominant auction site and offers a variety of auctions including Dutch auctions. Ebay can be found on the World Wide Web at URL “www.ebay.com”.
When one buyer attempts to do business with multiple potential sellers, a market-clearing mechanism must determine seller and price. This kind of commerce is fundamentally buyer-driven. The buyer chooses the product, sets the transaction terms, and seeks market venues in which it can achieve the lowest price. There are two classes of appropriate mechanisms: a Request for Quotation (RFQ), also referred to as a Request for Price (RFP), and a reverse auction.
An RFQ is an offer to buy that is published to many prospective sellers. Sellers bid for the business. The buyer typically chooses the seller based on price and other criteria. RFQ's may or may not constitute a binding offer to buy. RFQ's and RFP's are popular commerce vehicles for large buyers (e.g., governments and large corporations) who have a sufficiently large order to attract sellers and to justify the cost of publishing the RFQ.
In a reverse auction, multiple sellers bid for a buyer's order and price declines during the bidding period. The transacting sellers will be those sellers offering the lowest prices that are equal to or below the buyer's reserve price (the setting of a reserve price is optional). As is the case with a “forward” auction, the specific form of a reverse auction will depend upon the amount of product desired by the buyer and the goals of the prospective sellers and the buyer. The variations found among reverse auctions are primarily the inverse images of the variations of forward auctions (including the potential for the buyer to set a reserve price above which it will not transact). The essence of a reverse auction is that multiple sellers bid decreasing prices for the business of one buyer and that offers to buy and sell are binding upon the buyer and sellers.
Priceline (“www.priceline.com”) is a buyer-driven marketplace that has combined the communications connectivity of the Internet with essential elements of a fixed-price RFQ and a reverse auction to let a buyer name its own price. Priceline primarily creates a market in time-sensitive perishable products. A buyer submits a one-time, binding, fixed-price RFQ at a buyer-determined price. Priceline then could use a reverse auction to find a seller willing to sell at or below the buyer's fixed price. Or Priceline could buy the product at the lowest price available in the market and sells it to the buyer at the buyer's price. Of course, Priceline could also extract a fixed or variable transaction fee instead. Or, these fees could be included in the bid price, effectively reducing the price offered. Notably, these fees are independent of the market-clearing method they have chosen.
Priceline is the seller in a single-buyer, fixed-price RFQ system that has at least three major deficiencies. First, Priceline does not consolidate demand, since it provides product to only a single user at a time. Second, it offers no opportunity to achieve a lower price than the buyer's fixed offering price, should such a price be available in the market. Therefore it motivates postured prices, not the real price a buyer is willing to pay, since the buyer generally bids a lower price than it would actually pay to compensate for the uncertainty, lack of specificity in defining the product (e.g., non-stop-flight or only American or United Airlines), and the cost of a commitment with no market information. Finally, it cannot produce price-elasticity information since systems that motivate postured pricing do not know the true maximum prices buyers would pay. Although Priceline is buyer-driven, it is seller-biased, meaning that transactions are generally priced above the lowest available market price.
If there are multiple potential buyers and multiple potential sellers for a product or service, then a market-clearing mechanism must determine buyer, seller, and price. The traditional market-clearing mechanism used for such marketplaces is a bid-ask exchange mechanism. In a bid-ask exchange, multiple buyers each offer their own binding commitments to buy at their own stated bid prices. Multiple sellers each offer their own binding commitments to sell at their own stated ask prices. The bid-ask exchange mechanism clears a transaction at the bid-ask price when there is a bid price that equals an ask price. If there are multiple bids or multiple asks at the same price, then the exchange must decide which clears first. In less-automated exchanges, this is done by open out cry. In more-automated exchanges, it is done in the order of the time the offer was entered into the exchange. When a bid price is less than an ask price, no transaction clears. When a bid price exceeds an ask price, then the bid-ask exchange mechanism may clear the transaction at some price between the bid and ask price. However, bids do not exceed asks in practice, because the highest current bid and the lowest current ask are usually published. Buyers have no motivation to offer a higher bid than the lowest current ask. Similarly, sellers have no motivation to offer a lower ask than the highest current bid.
A bid-ask exchange is a marketplace where the buyer's offer is a binding offer to buy at a fixed price, and the seller's offer is a binding offer to sell at a fixed price. The buyer offer is essentially a binding fixed-price RFQ that goes to the first seller to meet the fixed price. The seller offer is similar to a retailer's offer to sell at a fixed price. Ultimately, the nature of the commerce that emerges is one-to-one.
The bid-ask exchange is a meeting place where buyers and sellers can efficiently find each other, post prices, and conduct one-to-one transactions. The bid-ask exchange works best for standard commodities where prices do not differ based on fulfillment costs, which could include shipping, tax, insurance, or service contracts. An all-in price is a price that includes all costs (base product, features and options, and fulfillment). All-in pricing can be used to overcome problems introduced by differences in actual cost based on variations in selected options and fulfillment expenses. However, all-in pricing is traditionally not used in bid-ask exchanges. In exchanges such as the NASDAQ stock exchange, commissions are added after prices are set. All-in pricing would include these additional costs.
The present invention overcomes the deficiencies in known market-clearing mechanisms by enabling a new form of multi-buyer, multi-seller exchange that is well-suited to group buying and group selling using demand aggregation and supply aggregation. When used for group-buying, the market-clearing methods and systems of the invention enable otherwise unrelated buyers to aggregate their purchases to create a larger order that sellers can price more efficiently. Sellers then competitively bid for the larger order. When used for group-selling, the market-clearing methods and systems of the invention enable otherwise unrelated sellers to aggregate their inventories to create sufficient supply to meet the needs of a buyer that none of the sellers alone could serve. Buyers then competitively bid for the aggregate inventory.
The present invention enables the creation of an exchange that may be run by a marketplace operator that may be a participant, a third party, or a technology provider. Exchanges consistent with the present invention comprise a meeting place where buyers and sellers can efficiently find each other, make individual offers to buy and sell products with varying attributes at varying prices with varying fulfillment costs, aggregate their collective demand or supply, and produce many-to-many transactions at multiple prices at the same time.
Group buying existed as a form of commerce prior to the emergence of the Internet. For example, group buying has long been used by natural food cooperatives. A natural food co-operative performs important functions for both buyers and sellers. Individual buyers of natural foods may not have an order large enough to economically attract any seller, much less a favorably-priced seller. By pooling their demand, natural food buyers achieve at least two goals: (i) they make it economically attractive for sellers to supply products they desire; and (ii) they get favorable prices in a marketplace e where multiple sellers compete for their business.
Group buying holds promise for significantly increased economic efficiency for buyers and sellers. Group buying enables low-volume buyers to achieve high-volume discounts. Group buying creates larger orders for sellers. A larger order lowers the seller's per-unit cost by enabling the seller to spread fixed costs over more units. At the same time, the increase in units sold creates the potential for greater aggregate profit.
For example, a seller's marketing costs may be constant and represent 10% of the seller's total cost in a typical sale. If market demand would be doubled at a 5% lower price, with no increase in marketing costs, a seller could price its product 5% lower to realize that demand. At a 5% lower price, the seller doubles its sales. By spreading fixed costs over twice as many units, the seller maintains its per-unit profit and doubles its total profit, while simultaneously giving the buyer a significant discount.
Group buying is especially attractive for commerce in products that are relatively standardized, are sold in high volume, have high fixed costs, and have low variable costs. The ability of a group-buying marketplace to realize the economic potential of group buying is proportional to the size of its buying groups. Larger groups create greater benefits for buyers and sellers.
Group buying has not been a widely accepted form of commerce since the improved economic efficiency of group buying was not available to buyers and sellers prior to the existence of a ubiquitous communication mechanism like the Internet. It was too costly for like-minded buyers to find each other and create buying groups. It was too costly for sellers to find and bid for the business of buying groups. The cost of forming large groups was prohibitive.
With the low-cost universal connectivity of the Internet, the barriers to forming buying groups have fallen and group-buying marketplaces have emerged to meet the needs of buyers and sellers. These have taken at lease two forms, including interest it aggregators and demand aggregators.
Interest aggregators aggregate non-binding expressions of buyer interest. Demand aggregators aggregate binding offers to buy. Demand aggregators are of much greater interest to sellers and can produce better prices. For example, if a demand aggregator presents an offer to buy 500 aggregated units of a product, sellers can safely bid aggressive high-volume, 500-unit prices for the product. If an interest aggregator presents a similar non-binding offer to buy, the seller does not know if zero or 500 or some other number of units will ultimately trade. The seller faces the risk of losing money if it bids a low 500-unit price but ultimately transacts materially fewer units. Sellers will normally avoid this risk by offering higher prices that will be profitable even at smaller quantities.
Demandline (“www.demandline.com”) is an example of an interest aggregator that pools the demand of multiple buyers, each of whom state its desired purchase price. Demandline personnel then negotiate with a well-known supplier on behalf of the buyer pool to achieve the price each buyer requests. Demandline targets larger purchasers of business products and services for which there are a several major recognized or reputable suppliers, for example, long distance telephone services or retail gasoline.
Examples of demand aggregators include ActBig (“www.actbig.com”) and Shop2gether (“www.shop2gether.com”), which target individual purchasers of consumer products and small business purchasers of office products, respectively.
All group-buying marketplaces today have a similar structure. They form groups of buyers of an identical product and solicit sellers to bid for the group order. The group determines a bidding period and typically sets an initial maximum price that all bidding sellers must meet or beat. In essence, the group becomes a single buyer and multiple sellers bid for the entire group's business. This de facto single-buyer, multiple-seller market motivates the use of a reverse auction to determine the winning seller and price.
In the idealized group-buying scenario, a few buyers form a buying group. Sellers bid a lower price for the group order than they would bid for any individual buyer's business. Other buyers join the buying group to take advantage of the lower price. The buying group becomes larger and attracts even lower bids that, in turn, attract more buyers. The result is that the group grows larger and price drops lower during the bidding period.
Unfortunately, this idealized scenario faces four problems that impede the formation of large buying groups and preclude the realization of the scenario. First, the cycle of larger groups and lower prices cannot get started because the reverse auction motivates contrary buyer and seller behavior. Consider the seller's motivation in a reverse auction. The optimal bidding strategy is to make exactly one bid—the last and lowest bid. Sellers have no motivation to bid early. As a result, ever-lower prices are not bid, because sellers wait to bid. Without lower prices, more buyers do not join the group. As a result, buying groups stay small, and no time remains in the bidding period for additional buyers to join when seller bids arrive shortly before the close of the bidding period. Therefore, there is a need in the art for a new market-clearing mechanism that motivates aggressively-priced buyer and seller offers early in the bidding period.
Second, using a reverse auction to clear the market fragments larger groups into smaller groups. To have orderly pricing in a reverse auction, all buyers in a group must buy the identical product under identical terms. Otherwise, the sellers lack a consistent basis on which to bid for the entire group's “single-buyer” order. The requirement for buying the identical product under identical terms forces the buyer of a copier with a 20-sheet collator to be placed in a different group from a buyer of the same copier with a 10-sheet collator. But the seller would have lower overall costs and the buyers could get lower prices if both could be kept in the same group. Therefore, there is a need in the art for a market clearing mechanism that does not fragment groups of buyers of similar but not identical products that could all be supplied by a single seller.
Third, buyers normally exercise individual choice in many dimensions when making a purchase. Ordinarily, buyers choose their own product features and purchase terms. They consider the pricing implications of alternative feature sets and purchase terms and evaluate their available tradeoffs across brands before committing to a specific product purchase. Fewer buyers will join buying groups that do not provide their expected choices and tradeoffs when making a purchase. Many buyers resist the requirement to purchase the identical product under identical terms. Restricting buyer choices and tradeoffs attracts fewer buyers and this results in smaller buying groups. Therefore, there is a need in the art for a market clearing mechanism that preserves buyers' choices, while still enabling them to purchase as a group.
Fourth, there is no good choice for the single price to be used in a reverse auction. If the price is based on the product price alone, then fulfillment costs are outside of the competitive bidding process. In this case, the optimum seller strategy is to bid very low prices for the product and then charge high prices for fulfillment. On the other hand, if the price basis is “all-in,” that is, it includes all costs including fulfillment, then sellers are motivated to bid high out of concern that a disproportionate number of buyers may have high fulfillment costs (e.g., delivery costs to distant locations, taxes in local jurisdictions, insurance to buyers with higher risk). It is possible to fragment a buying group into smaller groups of buyers so that all buyers in the smaller group have the same fulfillment costs (e.g., all in one Zip Code). Then sellers can bid their lowest all-in price, because there is no risk of adverse fulfillment costs. But doing so fragments naturally larger buying groups into smaller regional groups that produce smaller orders. The fragmentation precludes the economic benefits that a large order would create for both buyers and sellers. Therefore, there is a need in the art for a market clearing mechanism that allows for variable fulfillment costs within the same group to enable the formation of larger groups with better economics.
At the root of these problems is the use of a market-clearing mechanism that requires a seller to bid a price that applies uniformly to all buyers and that motivates sellers, and hence buyers, to wait until the last minute before making an offer to sell or buy. Reverse auctions, bid-ask exchanges, and forward auctions all have the single-price problem and all tend to discourage early offers by buyers or sellers. A new form of market-clearing mechanism is needed that (i) accommodates variable pricing, including variable all-in pricing; and (ii) motivates both buyer and seller behaviors to create the large groups that maximize the economic efficiency of group buying.
Additionally, a group-buying marketplace can operate more efficiently if sellers know the price elasticity of demand or the committed number of units that will sell at any given price. Accurate price-elasticity information allows a seller to lower its price with the knowledge that the corresponding increase in sales will justify the decrease in price. Also, accurate price-elasticity information allows a seller to avoid needlessly lowering its price when the price reduction will produce insufficient incremental sales to justify the price decrease.
Group-selling marketplaces are attractive to small producers and others who can form cooperatives to share common facilities and to aggregate total supply to attract more or larger buyers. Small agricultural producers of dairy and grain products have historically formed such cooperatives.
Similar to group-buying marketplaces, the Internet also enables the creation of efficient group-selling marketplaces that can efficiently price suppliers' aggregated supply. The issues of forming a group-selling marketplace are similar to those of a group-buying marketplace. Especially relevant is the necessity to (i) allow for variable prices among aggregated sellers in order to form larger groups and produce more efficient pricing for all parties; and (ii) to motivate buyer and seller behaviors that produce earlier offers.
Group-selling marketplaces differ from group-buying marketplaces in that a group-selling marketplace works well for commerce in standardized products that have limited supply, or whose cost of production increases with volume, for example, crude oil, commodity crops, and dairy products.
Bid-ask exchanges, auctions, and reverse auctions only discover the historical demand for products at previously demonstrated transaction prices. They cannot tell buyers and sellers how much product will trade at prices above or below those already demonstrated in the marketplace. Hence bid-ask exchanges, auctions, and reverse auctions cannot give sellers the information they need to determine the economic desirability of bidding prices lower than those previously transacted. But this is precisely the information needed to drive a maximally efficient marketplace.
None of the previously existing forms of a marketplace produce accurate real-time price elasticity for either demand or supply. Market participants normally invest in economic models to predict price-elasticity. Building such models is especially difficult for predicting demand at prices below those historically transacted or for predicting supply at prices above those historically transacted. Systems and methods consistent with the present invention can create accurate price-elasticity information in real-time for demand or supply so that the operation of a marketplace can approach optimal economic efficiency.